18.4 Permissibility of Non-PBE Adoption Dates for Other Entities’ Financial Statements or Financial Information Required in a Registrant’s Filings
At the July 20, 2017, EITF meeting, the SEC staff announced that it would not object
when certain PBEs elect to use the non-PBE effective dates solely to adopt the
FASB’s revenue and leasing standards. The staff announcement clarifies that the
ability to use non-PBE effective dates to adopt the revenue and leasing standards is
limited to the subset of PBEs “that otherwise would not meet the definition of a
public business entity except for a requirement to include or inclusion of its
financial statements or financial information in another entity’s filings with the
SEC” (referred to herein as “specified PBEs”).
While the staff announcement is written in the context of specified PBEs, the
principal beneficiaries of the relief will be registrants that include financial
statements or financial information prepared by specified PBEs in their own filings.
Regulation S-X rules under which such filings may be prepared could include:
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Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired.”
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Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”
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Rule 3-14, “Special Instructions for Real Estate Operations to Be Acquired.”
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Rule 4-08(g), “Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”
Under the leasing standard, there is one adoption date for PBEs and another
(later) adoption date for non-PBEs.
The ASC master glossary defines a PBE, in part, as a business entity that is “required by the [SEC]
to file or furnish financial statements, or [that] does file or furnish financial statements (including
voluntary filers), with the SEC (including other entities whose financial statements or financial
information are required to be or are included in a filing)” (emphasis added). The definition
further states that “[a]n entity may meet the definition of a public business entity solely because its
financial statements or financial information is included in another entity’s filing with the SEC. In that
case, the entity is only a public business entity for purposes of financial statements that are filed or
furnished with the SEC.”
Before the staff’s announcement, certain nonpublic companies applying the PBE
definition in the adoption-date criteria would have been required to use the PBE
adoption dates for the revenue and leasing standards. While the SEC staff
announcement provides considerable and welcome relief to registrants preparing to
adopt the leasing standard, it is purposely narrow in scope and should not be
applied by analogy to the adoption-date assessment for any other standards besides
the revenue and leasing standards. The SEC staff announcement does not preclude
specified PBEs from adopting the provisions of the revenue and leasing standards on
the adoption date applicable to all other PBEs if a specified PBE wishes to use the
PBE adoption date.
In November 2019, the FASB issued ASU 2019-10, which, among other things, amends the effective
dates of ASC 842 for non-PBEs to fiscal years beginning after December 15, 2020, and
interim periods within fiscal years beginning after December 15, 2021. At the 2019
AICPA Conference on Current SEC and PCAOB Developments, the SEC staff announced that
it would not object if specified PBEs adopt ASC 842 by using ASU 2019-10’s timelines
that apply to non-PBEs. This position was subsequently codified in ASU 2020-02. We understand that the SEC staff
will not object if specified PBEs adopt ASC 842 on the basis of the additional
deferral of the effective dates of ASC 842 for non-PBEs to fiscal years beginning
after December 15, 2021, under ASU
2020-05.
Example 18-3
Company A, a publicly traded manufacturer, holds equity method investments in
three of its nonpublic suppliers. After applying the
Regulation S-X significance tests, A has determined that it
must include summarized financial information for Suppliers
X, Y, and Z (under Regulation S-X, Rule 4-08(g)) in its SEC
filing. The only reason X, Y, and Z meet the definition of a
PBE is because they are required to include their financial
information in A’s SEC filing (i.e., they qualify as
specified PBEs). Consequently, X, Y, and Z plan to use the
non-PBE adoption dates of the revenue and leasing standards
when preparing their own stand-alone financial statements.
When including the summarized financial information of X, Y,
and Z in its own SEC filing, A is not required to adjust the
suppliers’ financial statements to reflect the PBE adoption
date of the revenue and leasing standards.
Connecting the Dots
Including Financial Statements or
Financial Information of Specified PBEs
A registrant that has passed certain significance tests required by SEC
Regulation S-X may need to include in its SEC filing the financial
statements or financial information of another entity. We believe that, in a
manner consistent with Topic
11 of the FRM, it is also appropriate for the registrant
to use financial information prepared by specified PBEs that apply non-PBE
adoption dates when performing these significance tests. However, on the
basis of paragraph
3250.1(m) of the FRM, if pro forma financial information is
being prepared under SEC Regulation S-X, Article 11, to reflect the
acquisition of a significant business, the registrant must still conform the
acquired company’s adoption dates and transition methods to its own in the
pro forma presentation for the periods after adoption.
Further, non-PBEs are permitted, as a practical expedient,
to use the risk-free rate as their discount rate when applying ASC 842 (see
Section 7.2.3). At
the October 21,
2020, CAQ SEC Regulations Committee joint meeting with the
SEC staff, the SEC staff discussed the impact of an acquired company’s use
of this practical expedient to adopt ASC 842 when a registrant must evaluate
the acquired company for significance and, in some cases, provide separate
financial statements for the acquired company. The SEC staff indicated that
it would not object if a registrant uses financial statements that reflect
the risk-free rate practical expedient to measure significance, since doing
so would result in higher ROU assets and thus would yield a higher measure
of significance under the asset test. The risk-free rate practical expedient
should be “the only difference between those financial statements and a PBE
set of financial statements.” However, the SEC staff stated that financial
statements provided in accordance with SEC Regulation S-X, Rule 3-05, are
PBE financial statements and thus may not reflect the risk-free rate
practical expedient. Therefore, a registrant would need to assess whether an
adjustment to use the relevant incremental borrowing rate that would apply
to each lease (as opposed to using the risk-free rate) would be material and
necessitate revision before such financial statements are provided in
accordance with Rule 3-05.